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Rystad Energy: Saudi Tax Cut Raises Aramco Value By $1 Trillion

Until yesterday, analysts were largely estimating the value of Saudi Aramco well below the Saudi claim that it is worth $2 trillion, but the Kingdom’s recent tax rate cut is making the oil giant more attractive to investors, and raises the valuation of its upstream portfolio by around $1 trillion, Rystad Energy said in a report on Tuesday.

Saudi Arabia said on Monday that it is cutting the tax rate on Aramco to 50 percent from 85 percent with a royal order introducing a new tax regime for all hydrocarbon producers operating in the Kingdom.

The high tax rate was one of the main reasons why international industry experts have not been valuing Aramco nearly as high as the $2 trillion that Saudi officials have been claiming.

“This tax change has a huge impact on the valuation of Saudi Aramco. By drastically reducing the tax rate, more cash will go to the potential owners of the Saudi Aramco compared to the government. Assuming long-term oil prices averaging 75 USD/bbl, the valuation of the company increases from $0.4 trillion to $1.4 trillion” Espen Erlingsen, VP Analysis at Rystad Energy, said in the report.

Rystad Energy is basing its estimates for Aramco’s value on discounted free cash for each individual field.

The valuation of Saudi Aramco heavily depends on the tax regime, and how profits are being split between the government—from taxes and royalties—and the owners.

“The total value of Saudi Aramco’s revenue after costs is around $3.4 trillion. With the old tax system, around 88% of the value went to the government through taxes and royalties, while with the new system around 60% of the profit goes the government,” Erlingsen said.

Related: Oil Companies Bet Big On This Mature Oil Play

By the time of the initial public offering, expected some time in 2018, the price of oil is expected to reach $75 a barrel, according to Erlingsen.

Sanford C. Bernstein & Co, which uses a different method to evaluate Aramco—enterprise value per flowing barrel—is putting the value of the Saudi company between $1 trillion and $1.5 trillion, according to Reuters.

By Tsvetana Paraskova for Oilprice.com

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  • Jhm on March 28 2017 said:
    Erlingsen claims that $75/b is a valid assumption because it is implicit in market valuations of major public oil companies. However, oil futures put oil at $50/b in 2018 and years beyond. So if the futures market calls this correctly, then oil major shareholders could be in for a 35% shortfall in revenue.

    So Aramco could easily IPO under $950B if oil is closer to $50/b than $75/b. And if that happens, watch out for oil major sticks as well.

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